Thomas Friedman and Benjamin Franklin

Books by Wilson Jeremiah Moses

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Thomas Friedman? Benjamin Franklin? Which do you Trust?

By Wilson J. Moses

November 26, 2008

Thomas Friedman, the author of "All Fall Down" NY Times (Nov 25, 08) often gets things wrong, before getting them half-right. He is unfair in placing any blame for this real estate bubble on the "People who had no business buying a home, with nothing down and nothing to pay for two years." People who fall into that category are of ordinary intelligence, and have need, as we all do, of "the kindness of strangers," in order to survive. Although some people with IQs of 90 are capable of grasping household microeconomics, others with IQs above 140 are not. Our current crisis provides incontrovertible evidence that, most Americans, including college graduates with high achievements on standardized tests, lack a basic understanding of saving and investment.

Benjamin Franklin created Poor Richard's Almanack to teach many things, among these, a non-confrontational class-consciousness, an appreciation for saving, and an awareness that personal prosperity sometimes, if not always, requires a moderate parsimony. Serviceable as it is, few Americans today can put Poor Richard's common-sense ethic into practice, to guide an enlightened self interest.

It is thus necessary and proper for a civilized nation to sustain such structures as fire departments, public schools, a well-regulated banking system, social security, and public health, in order to protect the masses, both bright and dim, from clever but unscrupulous risk-takers.

Another category of Friedman culprits, "people who had no business pushing such mortgages," did not for the most part make "fortunes doing so." Most of these are people of mediocre understanding, honest, but credulous, who work at the local bank on Main Street. These people also lack class consciousness and have never learned from Poor Richard's catechism how to serve their own interests. These people did not make millions, but currently find themselves in danger of losing their homes, victims of their own irrational exuberance and blind faith in the conventional wisdom of their leaders.

Friedman's third category, the people who were "bundling those loans into securities and selling them to third parties," are somewhat more culpable. These products of the Wharton, Chicago, and Stanford MBA programs, and lesser institutions, are capable of understanding their errors, and might have known better, but they are so lacking in creativity, imagination, and skepticism (despite their vaunted grade point averages and standardized test scores) that they really are not to blame either. They were simply following the teachings of their mentors in business school. They are ideologically screwed up and dreadfully spoiled, but not bad people at heart. It is simply that the typical MBA began with the intelligence of a playboy bunny, and was further dumbed-down by their business school.

More to blame are the professors, in the humanities and social sciences, who abandon the field of political economy to a few "experts" in the "appropriate departments." We stick to our syllabi, and allow our students to be misled that the reforms of the New Deal were the cause, not the cure of the Great Depression of 1929-1940. We fear to confront our colleagues who "validate" their positions with mathematical models, so elegant as to outdo the most artful constructions of classical and medieval astronomers. These hire teams of graduate students to crunch numbers to "prove" that the sun circles the earth, and the rest of the planets move in exotic epicycles.

Mathematicians and physicists, are thus blamable because, despite the lessons of the Long Term Capital debacle of the 1990's, they collaborated in the credit swap fantasies, inventing hypothetical choirs of angels to dance on the heads of hypothetical pins. Professors in the liberal arts and sciences betrayed ourselves and our students by our cowardly silence. A little faith in our own common sense might have led us at least to suggest, that the empire's clothiers were half-naked themselves.

These sorcerers and their Mickey Mouse grad students have interests overlapping those of their Wall Street chums, who did indeed make a lot of money from pumping up the real estate balloon. Also culpable are the Federal Reserve bankers, the Secretaries of the Treasury, the House and Senate committee members, whose buddies marketed and rated the bonds, sold them, bought them, refused to regulate them, and convinced ordinary people that unrestrained price inflation (whether in real estate, commodities, or securities) is inevitable, eternal, and benevolent.

There are plenty of Americans who really do try to live within their means; people who are content to have fixed-rate, 30-year mortgages at reasonable rates, who establish monthly budgets, who drive modest cars for a decade or more, pay their taxes, and try to accumulate capital by thrift and saving.

Controlled inflation can be beneficial to small capitalists, small farmers, and even to wage earning people. Benjamin Franklin realized as much when, at the age of twenty-one, he called for an increase in the colonial money supply. But the American dream of a perpetually expanding "South Sea Bubble" of the sort that Mr. Henry Paulson and his Wall Street cronies seek to restore is unrealistic.

Americans' realistic expectations during our most prosperous era, were solidly grounded in the Henry Ford principle of a living wage, and the Thomas Malthus principle of public spending towards development of public infrastructure. No restoration of economic security will be possible if we start with the assumption that these principles, which eventually came to be called "Keynesianism," have been entirely discredited.

The Roosevelt-Truman-Eisenhower economy provided a factory worker with a thirty year mortgage at 8%. It also provided a four percent return on a pass book account at a Main Street bank. An eighth grade graduate could afford to send two or three children to college, without taking out loans, and a young couple could afford a 20% down payment on their first home. Evolving world conditions may never allow for America to revert to that economy,

Thanks to Reaganomics, the Roosevelt structure has been so mindlessly vandalized that Eisenhower Era expectations are no longer realistic. But whatever the cause of our present ills, no cure will be found in the pseudo-patriotic bravado of so-called "conservative" think tanks, or in the pep talks of MSNBC pundits. Any solution must be found in a completely new appreciation of those areas of the economy that are actually productive, including industry, agriculture, communications, transportation, and trade. We need producers like Ford and Rockefeller, Carnegie and Bill Gates, who despite their predatory tendencies, at least create material industries.

Finance is not an industry but a service, where we do not need those who commit the semantical crime of referring to securitized mortgages as "products." The demand of the hour is not for buccaneers or risk-takers, but for sober anti-inflationists like Nicholas Biddle and J. P. Morgan to guard against the speculative borrow-and-spend bubbles that accompanied Reagan's voodoo economics.

Friedman states an obvious and almost redundant truth, obvious to at least some of us. The system is broken, and the American dream, insofar as it is based on a perpetual spiral of borrowing to speculate, is completely unrealistic. Friedman admits that certain irrational aspects of the dream may not be retrievable in the short run. My reading of Poor Richard's Almanack leads me to the common-sense assumption that they are not realizable in the long run either.

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posted 27 November 2008